Abstract

This paper explores the effects of fiscal policy in an economy based onindirect taxes, and one that is constrained to taxing all (labor and capital) incomeat the same rate. The focus of the paper is on the relative importance of consumptionvs. income taxation, as well as on the provision of utility-enhancing publicservices. To this end, a Real-Business-Cycle model, calibrated to Bulgarian data(1999–2014), was set up with a richer public finance side. Bulgarian economy waschosen as a case study due to its major dependence on consumption taxation asa source of tax revenue. To illustrate the effects of fiscal policy, two regimes werecompared and contrasted to one another - exogenous vs. optimal (Ramsey) policycase. The main findings from the computational experiments performed are: (i)The optimal steady-state (capital and labor income) tax rate is zero, as it is themost distortionary tax to use; (ii) The optimal steady-state consumption tax (theonly source of revenue) has to almost double to finance the optimally-set level ofgovernment purchases

Additional Information:

The final published version of this article can be accessed online at https://www.degruyter.com/view/j/roe.2018.69.issue-1/roe-2017-0022/roe-2017-0022.xml